September 15, 2012

The Objectives of the Federal Reserve: Memorandum from Governor Marriner Eccles to Senators Glass, Fletcher, and Bulkley on June 6, 1935

Marriner Eccles:

The proposed Banking Act of 1935, as originally introduced, contained no statement of objectives to be sought by the Federal Reserve Board in exercising the powers of credit control granted to it.

It was argued, however, that Congress was delegating to the Board some of its legislative power to coin money and regulate the value thereof, and, accordingly, that a guiding principle or statement of objectives should be included in the bill in order to eliminate any question as to the constitutionality of the delegation of power.

As a result, H.R. 7617, when it passed the House on May 9, 1935, contained the following statement of objectives in section 204(b) of the bill:

It shall be the duty of the Federal Reserve Board to exercise such powers as it possesses in such manner as to promote conditions conducive to business stability and to mitigate by its influence unstabilizing fluctuations in the general level of production, trade, prices, and employment, so far as may be possible within the scope of monetary action and credit administration.

Thus there was as of 1935 a quadruple mandate: production, trade, prices, and employment--all subsumed under the heading of "promot[ing] conditions conducive to business stability".

The 1946 Employment Act--which applies to the Federal Reserve as much as to other arms of the federal government--took a different tack:

The Congress hereby declares that it is the continuing policy and responsibility of the federal government to use all practicable means… for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare… useful employment for those able, willing, and seeking work, and to promote maximum employment, production, and purchasing power…[1]

The 1978 Humphrey-Hawkins bill shifted the Federal Reserve to its current position, requiring that the Federal Reserve implement monetarism:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential…

and imposes either a triple or a quadruple mandate, depending on whether one understands "production" as a separate goal:

…to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

[1] Full text:

The Congress hereby declares that it is the continuing policy and responsibility of the federal government to use all practicable means consistent with its needs and obligations and other essential considerations of national policy with the assistance and cooperation of industry, agriculture, labor, and State and local governments, to coordinate and utilize all its plans, functions, and resources for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare, conditions under which there will be afforded useful employment, for those able, willing, and seeking work, and to promote maximum employment, production, and purchasing power.

Comments

The Objectives of the Federal Reserve: Memorandum from Governor Marriner Eccles to Senators Glass, Fletcher, and Bulkley on June 6, 1935

Marriner Eccles:

The proposed Banking Act of 1935, as originally introduced, contained no statement of objectives to be sought by the Federal Reserve Board in exercising the powers of credit control granted to it.

It was argued, however, that Congress was delegating to the Board some of its legislative power to coin money and regulate the value thereof, and, accordingly, that a guiding principle or statement of objectives should be included in the bill in order to eliminate any question as to the constitutionality of the delegation of power.

As a result, H.R. 7617, when it passed the House on May 9, 1935, contained the following statement of objectives in section 204(b) of the bill:

It shall be the duty of the Federal Reserve Board to exercise such powers as it possesses in such manner as to promote conditions conducive to business stability and to mitigate by its influence unstabilizing fluctuations in the general level of production, trade, prices, and employment, so far as may be possible within the scope of monetary action and credit administration.

Thus there was as of 1935 a quadruple mandate: production, trade, prices, and employment--all subsumed under the heading of "promot[ing] conditions conducive to business stability".

The 1946 Employment Act--which applies to the Federal Reserve as much as to other arms of the federal government--took a different tack:

The Congress hereby declares that it is the continuing policy and responsibility of the federal government to use all practicable means… for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare… useful employment for those able, willing, and seeking work, and to promote maximum employment, production, and purchasing power…[1]

The 1978 Humphrey-Hawkins bill shifted the Federal Reserve to its current position, requiring that the Federal Reserve implement monetarism:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential…

and imposes either a triple or a quadruple mandate, depending on whether one understands "production" as a separate goal:

…to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

[1] Full text:

The Congress hereby declares that it is the continuing policy and responsibility of the federal government to use all practicable means consistent with its needs and obligations and other essential considerations of national policy with the assistance and cooperation of industry, agriculture, labor, and State and local governments, to coordinate and utilize all its plans, functions, and resources for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare, conditions under which there will be afforded useful employment, for those able, willing, and seeking work, and to promote maximum employment, production, and purchasing power.